Occam Nabs FairPoint Business

Occam Networks Inc. (Nasdaq: OCNW) secured some major access business, as the company was chosen for a network upgrade announced by FairPoint Communications Inc. (See FairPoint Picks Occam.)

The upgrade will take place in former Verizon Communications Inc. (NYSE: VZ) territories in New England that FairPoint is acquiring through a deal announced early last year. (See FairPoint Takes Verizon Ops.)

Following the close of the deal, FairPoint has pledged to upgrade the former Verizon network in a multi-phase process. The network in question includes about 1.6 million access lines throughout Maine, Vermont, and New Hampshire.

The upgrade will include the deployment of Occam's BLC 6450 to create redundant 10-Gigabit Ethernet rings servicing more than 200 central offices in the region. Occam's BLC 6214 will also be used to add more than 50,000 new DSL lines in rural areas. (See FairPoint Plans Upgrade.)

Russ Sharer, Occam's vice president of marketing and sales, says the equipment's performance, ability to scale, and common management platform were key in winning the contract.

In a research note issued this morning, Jefferies & Company Inc. analyst George Notter writes that the total value of the deal is difficult to estimate. However, he expects Fairpoint to invest "a meaningful amount" to upgrade the network over the next few years.

"Through negotiations with regulatory agencies, the carrier has already committed to $57 million of capital spending over five years in Maine and at least $40 million each year for the next three years in Vermont. Only a fraction of the spending will be on access infrastructure, but we imagine the deal will be large enough to be interesting for Occam investors," Notter writes.

Although FairPoint received approval from the Federal Communications Commission (FCC) last week, the company still needs regulatory approval from various state agencies before the deal can be closed. (See FairPoint Approved.)

FairPoint has already gotten an OK for the transaction from Maine regulators, and it has reached a tentative agreement with the Vermont Public Service Board, according to Notter. But the company still needs approvals from New Hampshire regulators and the Vermont State Utilities board.

FairPoint is a long-time customer of Occam's, but in terms of access lines, this is the largest individual contract win for the equipment vendor. Sharer says this shows the continued momentum for his company as it serves ever-larger service provider customers. (See Occam Wins FairPoint.)

"This is a huge endorsement of everything we've been working on for the last five years," Sharer says. "This is the first time we'll be deployed at a phone company with 1 million-plus subscribers. It shows our products are growing into larger and larger networks."

— Ryan Lawler, Reporter, Light Reading

OSXman 12/5/2012 | 3:49:41 PM
re: Occam Nabs FairPoint Business That's one way to look at it. Here is another way.

1.) Cap ex in Maine is probably going up so satisfy the regulators. Ditto NH. This PR was put out not for Occam but for the regulators so Fairpoint can show what their plans are and how good it is going to be for the people of ME, VT and NH, those good salt of the earth heavy broadband users.

2.) The PR really reads quite nicely for Occam. While Occam is the incumbent at Fairpoint, this was a competitive situation and Occam won. They have a good product.

3.) 50,000 dsl lines is probably just the start. I don't know that for sure, but that's my guess. They talk about things like 90% broadband penetration and stuff like that.

In terms of valuation, you can buy a first rate product for just $50mm. I mean, in better times for the market, how many money losing companies with a promising product sold for big mutiples of revenues? Occam has a proven product and sells for 0.5x revenues.

Yes, they have got a ways to go to breakeven. Management has proven a very high level of incompetence in terms of financial management. The internal control situation is an unmitigiated disaster.

If I were the board, I would use this contract as a means of selling the company.
Polder 12/5/2012 | 3:49:41 PM
re: Occam Nabs FairPoint Business cap ex spending of $57M over five years in Maine and $40M per year for three years in Vermont totals $51.4M per year. 50,000 DSL lines to be upgraded. No matter how you do the math, this project equates to maybe $8M at best in business per year for Occam.

The larger story at Occam is the collapse of it's stock price in 2007 from over $9 per share to around $3 per share due to the accounting issues. The company is trading for little more than their cash in the bank. Couple that with the statements from their last conference call:

1) OCNW forecasting $85-90mil in 2008, but they have no forecast for 1Q 08. So, that forecast doesn't mean much given their accounting track record.

2) OCNW says 28mil/qtr in revs to break even. That is $112mil/yr in revs. Even with their estimates, they will not get that in 2008 and OCNW would have to grow another 30% in 2009 just to break even.

Occam has a long road to travel to profitability. Fairpoint will help but I suspect the vastly underestimate the cost and complexity of developing a GPON product.
Toad680 12/5/2012 | 3:41:17 PM
re: Occam Nabs FairPoint Business Andrew Schmitt is pegging the revenue to Occam at $125 million in his analysis on Nyquist. That's pretty chunky!

Fairpoint & Occam Networks
Fairpoint Communications (FRP) plans to spend $781M over the next 5 years maintaining and upgrading the network they purchased from Verizon. Details provided by Fairpoint and fundamental metrics of the Broadband Loop Carrier business lead us to believe Occam will recognize up to $125M in revenue, of which $80M will come in the next 18-24 months, provided Fairpoint executes itGÇÖs current capex plan.

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